Insurers grab ‘illiquidity premium’ in private markets [Daily News]

cash liquidity
  • 87% of insurers plan to increase allocation to private markets
  • Average planned increase amount to 3% over the next two years
  • Majority to take action in the next two years on the ‘S’ in ESG

The majority (87%) of global insurers are looking to increase their allocation to private markets in the next 24 months, BlackRock’s latest Annual Global Insurance Report shows.

The average planned increase is 3% over the next two years: 68% said the change will be between 1% and 5%, while 7% seeks to add 10% or more to the share.

Only 3% said they intend to lower their allocation to private markets, and all of them said the scale would be less than 10%.

According to the report, insurers continue to seek greater exposure to private markets, which offer the potential for attractive risk-adjusted and diversifying exposures.

In the report Jayson Bronchetti, CIO at Lincoln Financial Group, said: “We have allocated approximately 35% of our new money to private assets over the past five years. We expect to continue to grow that allocation into the future, focusing on asset classes with strong underwriting processes, protective covenants, and proven risk-adjusted returns to provide downside protection in a decelerating economy.”

Private markets also offer an alternative strategy when 58% of the respondent think liquidity is the most serious market risk consideration over the next 12 to 24 months, the report found.

“Market liquidity is materially lower today than it has been since before the global financial crisis. This makes us more inclined to earn an ‘illiquidity premium’ in private markets since investors may not be receiving the same degree of public market benefit as they have historically,” Anthony Grandolfo, CIO at GE Capital said in the report.

The survey identified sustainability as one of the strategic trends most likely to accelerate. Sixty-two per cent of the respondents said the focus on sustainability as a driver for decision making will be the major strategic trend that accelerate in the insurance industry over the next 12-24 months.

A large majority of respondents were either likely or very likely to take action in the next two years in the social aspect on the ESG front. Eighty six percent of the respondents considers diversity, equity and inclusion in some way when selecting an asset manager; more than 80% consider DE&I at least some of the time when selecting partners, vendors, or brokers; and 86% of respondents take DE&I into account at least some of the time when selecting investments.

The survey also showed that structured solutions have become a common tool for insurers when allocating to private market strategies but accessing the asset class in the wrong way was also viewed as a risk in times of volatility.

“Private market valuations are not immune to volatility in a regime of higher volatility. Selectivity is more important than ever before,” said Vivek Paul, Head of Portfolio Research at BlackRock Investment Institute.

Key Takeaway: Asset managers with a good ESG track record that can provide bespoke investment solutions are in a better position to capture the enlarged market.

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Author: emily.lai